When I ask people what they believe their most valuable asset is, I usually end up with answers that relate to possessions such as motor vehicles, houses and so on.
If you think about it though, our most valuable asset is our ability to earn an income throughout the course of our life.
According to the Australian bureau of statistics, the average full-time wage for an adult is $1,533.40 per week. The table below shows the lifetime earnings capacity of different age groups (based on this and not accounting for wage increases);
|Gross Earnings to age 65
Allowing for the fact that a 25 or 30-year-old may not yet be earning the average wage, the amount of money we can earn during our life is considerable. Therefore, I would argue our ability to earn an income is our most valuable asset, and the very thing that we should consider insuring.
But don’t I already have insurance in my super fund I hear you say?
When we ask people if they have enough insurance, most people will reply with “yes no worries I have that covered in my super fund”.
The problem is that insurance held in superannuation is often seriously inadequate. Unfortunately, people don’t know what they don’t know, they just think it’s ok.
There are 3 things everyone should know;
- You may not be paid your Total and Permanent Disability (TPD) insurance if you are unable to work through accident or illness.
- The insurance company can change the terms, cancel your insurance, or not even pay you if you need to claim.
- You probably don’t have enough insurance in any case.
1. Why your TPD insurance may not cover you
We’ve all seen the current affair stories on TV, and newspaper articles. The one’s where people who thought they had insurance were denied a claim because they couldn’t do their job, but they could do any other job.
One of the biggest drawbacks of insurance held in superannuation is that it’s based on a disability definition of “Any Occupation” cover. This means that if you meet with an accident or illness which prevents you from working in your current job, but instead were found that you could do any other job, then your insurance company would likely deny the claim.
This offers little protection for people who find themselves unable to work due to a disability.
The preferred choice therefore is to hold “Own Occupation” TPD Insurance. This means that if you are unable to work in your current occupation (because of a disability), then you would be able to claim, regardless if you could work in any other occupation.
Obviously, this offers greater protection. The drawback however, is you cannot hold this type of insurance inside a superannuation fund.
2. Why you may not even be paid a claim in any event
Insurance cover offered inside most Industry (and some Retail) superannuation funds is held under what is known as “Group Insurance”.
Group Insurance is often considered to be a one size fits all approach. This means that your personal medical and lifestyle history are not considered at the time of application, but rather at the time of claim. This can potentially lead to claims being denied.
Another issue with Group Insurance is that the insurance company holds all the cards. They can change the terms of the insurance, and they can cancel your insurance without ever having to seek your permission.
As such, we think Group Insurance is too risky.
The preferred option is to use a retail insurance policy where you are assessed for your suitability for insurance based on your medical and lifestyle history. Once cover is accepted, the policy is guaranteed renewable and non-cancellable.
3. So how much is too much? (or not enough)
According to the website Lifewise*, Australia is one of the most underinsured developed nations ranking 16th for life insurance density and penetration. Research consistently shows that Australians don’t take out adequate insurance to protect either themselves or their family.
I am constantly amazed that when people tell me they have adequate insurance. For example, they may say “I have say $250,000 worth of insurance protection”. I understand that this seems like a lot of money to some people however referring to the above table, it would only cover a little over 3 years’ income.
The question people should really ask themselves when thinking about their insurance, is how much of my income would I (or my family) need if I were unable to ever work again. And how many years would need that income for.
When you think of it this way, the average person needs insurance cover considerably higher than they probably hold.
Ultimately, the question we should be asking ourselves is how much money would I need today to support myself, or my family for the rest of my life, if I were unable to ever work again.
It is only when we ask ourselves these questions can we arrive at an answer close to the amount of insurance cover we should hold.
So…what should you do?
I would encourage everybody to seek the services of a qualified professional to;
- assess the insurance that they now hold, and
- to assess the amounts of insurance they need to adequately protect themselves and their family.
In my opinion this is not something to be put off. The very nature of insurance is to cover for the unexpected. This means none of us know when we need insurance, but the inadequacy of our current arrangements is only ever highlighted at the most critical time, the time of the claim.
This is when we need insurance the most, and unfortunately this is usually the time when people find their insurance won’t do what they expected it to do.
If you would like an opinion on your existing insurance arrangements we would love to hear from you.
There is a saying, “plan for the worst and hope for the best”. That is how we should approach our insurance planning.
Want to know more? Click here to get a free quote: Compare Life Insurance Plans.
* Lifewise is a website a site coordinated by the financial services Council of Australia.